Valid points but the argument is that the
market is not fairly valuing the assets at this time since the market has
failed and is illiquid. Assets have different values in an organized
sale, an auction, and a panic. Carrying them on the books at some
arbitrary inflated value based on an over priced market at the time of
acquisition is just as invalid as marking to market in today's environment.
Perhaps a new mark to market rule that used a 50 or 200 day moving average
would be more realistic. Thereby taking note of the market but ignoring
the high daily beta that sometimes rattles things.
A 2nd not about the overall "fix"... We have taken over 3.6 trillion
of fannie/freddie debt, spent 250 billion or so on fed bank takeouts, and now
are talking about $700 billion for the latest action to remove credit/debt
swaps from the market and balance sheets. This is already over 4.5
trillion dollars. As recent discussion about the $85 billion bailout for
AIG demonstrated 85B/200million tax payers = $425.00 per adult in the
USA. That can round off to about $500 per $trillion. multiply that
by the $5 trillion or so the gov't will no doubt assume in debt to deal with
the current problems before its all done and you have $2,500 per adult in the
country. Liquidity could be added to the markets by pumping it into the economy
from the consumer side by giving $2,500 in spendable script to each adult in
the US. By doing it as spendable script it would not get stashed away as
savings or to pay old bills but would only be useful to spend. Thus
consumers would spend, those who are tight on mortgage payment money would have
a supplement to carry them along, etc. Defaults would decline strongly,
the economy would soar with businesses (and only domestic business at that)
would gain sales and liquidity, housing markets would have time to stabilize
with the shut off of more defaults for quite some time and all could bet back
to a more normal environment where long term fixes could be designed to correct
the structural problems in the system and could then have the time to be
implemented and work slowly.
Yes, its purely inflationary or a redistribution of wealth or a combination of
both. But then so are the other fixes being contemplated right
now. This one targets main street instead of wall street and keeps
the gov't layouts directed purely domestically and instantly builds confidence
with each and every US adult as it puts spendable money in their pockets.
Boater805
At 09:34 AM 9/30/2008, you wrote:
I agree - suspending
mark-to-market is crazy as is lending to the troubled institutions instead of
buying their assets. I am surprised that analyst's don't evaluate the impact
these alternatives have on the balance sheet. Selling insurance to those
without any cash is also nuts. Where is the basic understanding of this issue?
This is all about restoring confidence and weakening the balance sheet or
increasing expenses is not the answer.
Jim
----- Original Message -----
From: Code
2
To: Pete Holt
Sent: Tuesday, September 30, 2008
8:05 AM
Subject: Re: [RT] Paulson Plan
I agree with John Mauldin's
comments on asset valuation; however his
suggestion to suspend mark-to-market accounting is
wrong.
It does not help investors,
depositors or regulators to allow
financial institutions to overvalue
their assets and therefore
overstate their capital reserves.
And to make matters worse,
re-jigging reported asset values
only when it is convenient to prevent
an institution from failing is just insanity.
Here's an example. I buy a house
for $1 million and finance it with a
$900,000 loan. Let's say its value
goes up to $1.2 million, so I
report that value on my credit
application to the bank and borrow an
additional $180,000. A year later,
the value of my house declines to
$600,000. Mark-to-market accounting
says I must report a deficit of
($600,000 - $900,000 - $180,000)
$480,000. Suspending mark-to-market
accounting says I continue to
report $120,000 of equity. Which paints
the true picture? Oh, and following
the suspension of mark-to-market
accounting, with my $120,000 of
"equity," I convince you, an investor,
to put up $60,000 for an equity interest in my house.
An interesting benefit of Goldman
Sachs and Morgan Stanley's recent
switch to bank holding companies
was that certain assets no longer get
marked to market. They avoid
reporting the decline in value of
billions of dollars of certain assets.
From: Pete Holt <peteholt@xxxxxxx>
To: realtraders@xxxxxxxxxxxxxxx
Date: Monday, September 29, 2008,
9:36:52 PM
Subject: [RT] Paulson Plan
This (from John Mauldin's Outside
the Box) would seem to be the key
deficiency in the Paulson Plan.
Don't see how this can be fixed in
the short run.
There is one practical problem that
will plague the Paulson Plan and
any plan that involves the
government purchasing distressed assets
from financial institutions. These
assets are NOT(!!!) accurately
valued on the books of financial
institutions.5 Accordingly, these
institutions are not in a position
to sell them to the government at
current fair market value. Any
sales at current market value would
inflict huge losses on these
institutions. The alternative is for the
government to grossly overpay for
these assets, which would constitute
a disguised capital infusion into
these firms that would short-change
the American taxpayer. This flaw in
the plan is why members of
Congress from both sides of the
aisle insisted on some kind of
profit-sharing structure that would
compensate taxpayers in the event
the government pays above-market
prices for assets. HCM fears that
very little of the $700 billion is
going to be spent in the near
future because of the reluctance of
banks to part with assets at
anywhere near their current value,
and the government's reluctance to
overpay for these assets.
5 Although in fairness all the
blame for this can't be placed on these
institutions. There is currently no
market for many of these assets
and placing a value on them would
be an arbitrary exercise. This is
why mark-to-market accounting
should be suspended for an indefinite
period of time.
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